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Too Much Spending at Office Depot

It's hard to turn things around when revenue isn't rising as fast as expenses.

Office Depot (NYSE: ODP), like competitors OfficeMax (NYSE: OMX) and Staples (Nasdaq: SPLS) and many other retailers, has paid a steep price for its recent tough times. Office Depot's stock price has fallen 62% from its 52-week high, and the trailing P/E ratio is teetering below 8. Did the company start taking care of business in the fourth quarter?

Based on Tuesday's earnings release, I don't think so. Sales were lackluster, with total quarterly revenue inching up just 1% year over year, on a 3% drop in North American retail sales and a 7% decline in same-store sales. On top of almost-stagnant overall revenue numbers, quarterly expenses actually increased by 40 basis points, even though Office Depot only opened a third of the stores that it did in the fourth quarter of 2006. The annual numbers aren't much better: Revenue grew only 3%, cost of goods sold increased more than 6%, and EBIT dropped 32%, resulting in a 18% drop in earnings per share.

What can Office Depot do to turn things around? The company blames its sales decline on the housing market. It's not as though the housing crisis has come up overnight, so the drop in sales can't have surprised management. In light of the revenue numbers, the company's lack of cost control is especially concerning.

Office Depot does offer a glimmer of hope that it will try to turn things around this year. The company plans to cut capital spending by 19% and launch only 75 stores (Office Depot opened 71 stores in 2007). Management is signaling that change might be coming, with a stock repurchase program "if cash flow permits." Instead of trying to give the impression that a comeback is imminent, Office Depot should focus on tightening expenses and boosting revenue to help revitalize itself in this increasingly competitive sector.